What is F and O in Share Market?
What is F and O in Share Market?
Futures:
A futures contract is a contract between two parties to buy or sell an asset for a price agreed upon today with delivery and payment occurring at a future point, the delivery date.
A futures contract is a contract between two parties to buy or sell an asset for a price agreed upon today with delivery and payment occurring at a future point, the delivery date.
This means you agree to buy or
sell the underlying security at a 'future' date. If you buy the contract, you
promise to pay the price at a specified time. If you sell it, you must transfer
it to the buyer at a specified price in the future.
What is an options contract ?
This gives the buyer the right
to buy/sell the underlying asset at a predetermined price, within, or at end of
a specified period. He is, however, not obligated to do so. The seller of an
option is obligated to settle it when the buyer exercises his right.
How can the contract be
settled?
The contract will expire on a pre-specified expiry date (for example, it is the last Thursday of the month for equity futures contracts). Upon expiry, the contract must be settled by delivering the underlying asset or cash. You can also roll over the contract to the next month. If you do not wish to hold it till expiry, you can close it mid-way.
The contract will expire on a pre-specified expiry date (for example, it is the last Thursday of the month for equity futures contracts). Upon expiry, the contract must be settled by delivering the underlying asset or cash. You can also roll over the contract to the next month. If you do not wish to hold it till expiry, you can close it mid-way.
Options:
An option is a contract which gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. The seller has the corresponding obligation to fulfill the transaction – that is to sell or buy – if the buyer (owner) "exercises" the option. The buyer pays a premium to the seller for this right.
Leverage: Options help you profit from changes in share prices
without putting down the full price of the share. You get control over the
shares without buying them outright.
Hedging : They can also be used to protect yourself from
fluctuations in the price of a share and letting you buy or sell the shares at
a pre-determined price for a specified period of time.
Though they have their advantages
In this trading in options is more complex
than trading in regular shares. It calls for a good understanding of trading
and investment practices as well as constant monitoring of market fluctuations
to protect against losses.
‘CALL’ Option
:
The ‘Call Option’ gives the
holder of the option the right to buy a particular asset at the strike price on
or before the expiration date in return for a premium paid upfront to the
seller. Call options usually become more valuable as the value of the
underlying asset increases. Call options are abbreviated as ‘C’ in online
quotes.
Example:
v
Step1:Purchase
1 Lot of TCS May 3000 Call option, Spot
price Rs.2900/Share
v
Step2:Pay
premium of 25000 or Rs.250/Share
v
Step3:If
spot Price Exceeds Rs.3250,Exercise option
v
Step4:If
spot price under Rs.3250 on Expiry, Let option Expire
This means, under this
contract, Karthick has the rights to buy one lot of 100 Infosys shares at Rs
3000 per share any time between now and the month of May. He paid a premium of
Rs 250 per share. He thus pays a total amount of Rs 25,000 to enjoy this right
to sell.
Now, suppose the share price of TCS rises over
Rs 3,000 to Rs 3200, Karthick can consider exercising the option and buying at
Rs 3,000 per share. He would be saving Rs 200 per share; this can be considered
a tentative profit. However, he still makes a notional net loss of Rs 50 per
share once you take the premium amount into consideration. For this reason, Karthick may choose to actually exercise the option once the share price crosses
Rs 3,250 levels. Otherwise, he can choose to let the option expire without
being exercised.
‘PUT’
Option :
The Put Option gives the holder the right to sell a particular asset at the strike price anytime on or before the expiration date in return for a premium paid up front. Since you can sell a stock at any given point of time, if the spot price of a stock falls during the contract period, the holder is protected from this fall in price by the strike price that is pre-set. This explains why put options become more valuable when the price of the underlying stock falls.
The Put Option gives the holder the right to sell a particular asset at the strike price anytime on or before the expiration date in return for a premium paid up front. Since you can sell a stock at any given point of time, if the spot price of a stock falls during the contract period, the holder is protected from this fall in price by the strike price that is pre-set. This explains why put options become more valuable when the price of the underlying stock falls.
Similarly, if the price of the stock rises
during the contract period, the seller only loses the premium amount and does
not suffer a loss of the entire price of the asset.
Month
|
Price
|
Premium
|
February (Current
month)
|
Rs 1040 Spot
|
NA
|
May
|
Rs 1050 Put
|
Rs 10
|
May
|
Rs 1070 Put
|
Rs 30
|
Karthick buys 1000 shares of
Company X Put at a strike price of 1070 and pays
Rs 30 per share as premium. His total premium paid is Rs 30,000.
Rs 30 per share as premium. His total premium paid is Rs 30,000.
If the spot price for Company X falls below the Put option Karthick bought, say to Rs 1020; Karthick
can safeguard his money by choosing to sell the put option. He will make Rs 50
per share (Rs 1070 minus Rs 1020) on the trade, making a net profit of Rs
20,000 (Rs 50 x 1000 shares – Rs 30,000 paid as premium).
Alternately, if the spot price for Company X rises higher than the Put option, say Rs 1080; he would be at a
loss if he decided to exercise the put option at Rs 1070. So, he will choose,
in this case, to not exercise the put option. In the process, he only loses Rs
30,000 – the premium amount; this is much lower than if he had exercised his
option.
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